Monday, March 15, 2010

Problems in Napa Valley

Business Week reports that, "As many as 10 premium wineries and vineyards in the area—home to the nation's priciest grapes—will change hands in distressed sales or foreclosures this year and next, according to an estimate by Silicon Valley Bank." The article explains that many people entered the wine business during the economic boom, buying up very expensive land in Napa Valley and trying to produce high-end wines. While revenue growth for wine had been strong for many years, things have changed with the economic downturn. Fewer people are buying super and ultra premium wines, and more folks are turning to lower-priced, but good quality imports from countries such as Chile, Argentina, and Australia.

What the article does not mention is that the economics of producing high-end wines in places like Napa proves especially challenging because of the long time horizon in the ultra premium wine-making business. First, the firm must make a substantial capital investment to purchase the land and equipment. Second, a long time lag exists between the year in which vines are planted and the point at which aged wine is finally sold to consumers. If a firm purchases land and plants vines today, it harvests the first grapes from those vines three years from now. The winery sells the first aged ultra-premium wine in Year 5, and full-scale wine production does not occur until between Year 7 and Year 10. That's a very long time to wait for a return on a very expensive investment. One has to be very patient, and you have to be able to command a strong price for high quality wine to make the returns attractive. Falling real estate values and high mortgage payments can make it impossible for small wineries to survive, as we are seeing now. Frankly, even with stable real estate values, the payoff for such a real estate investment can be way off into the future.

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Michael Roberto

The Great Courses

About Me

I am the Trustee Professor of Management at Bryant University in Smithfield, RI. I joined the faculty after serving for six years on the faculty at Harvard Business School.

My research, teaching, and consulting focuses on leadership, with a particular emphasis on decision-making and teams. I have published two books based upon my research: Why Great Leaders Don't Take Yes For An Answer (2nd edition to be released in May 2013), and Know What You Don't Know (2009).